The Year Net Income Disappears Forever

I’ve talked before about how the new revenue standard will result in recognizing revenue as early as possible and recognizing expense as late as possible; but I haven’t focused on what these changes will mean in the year a company transitions to the new revenue standard. To put it in simple terms, there is revenue you will never recognize and expenses you will recognize twice when you transition to the new revenue standard. I’m sure many of you think I’m writing some sort of joke, but I’m not; so let me give you a quick primer before you take this message to your CFO.

It doesn’t matter if you adopt the standard using the full or modified retrospective approach to transition. Under either method, there will be revenue you will never get to recognize in an earnings release. The easiest way to determine how much revenue a company lost is to look at the difference between deferred revenue at 12/31/17 and contract assets and deferred revenue (contract liabilities) in the restated 12/31/17 balance sheet (under full retrospective) or on the 1/1/18 balance sheet (under the modified retrospective method). Contract assets and lower deferred revenue represent “revenue” that will never be recognized in the income statement.

On the expense side, the new standard requires the deferral of expenses to acquire and fulfill contracts. This means at transition, expenses that were already recognized by a company in 2017, 2016 or even earlier will be put on the balance sheet and recognized again in 2018, 2019 or thereafter. If you want to know how much, look to the adjusted balance sheet again. The creation or increase in such deferred costs on the balance sheet represents the amount of expense companies will be recognizing twice.

The lack of disclosures from companies about the impact of the new standard makes it impossible to estimate the lost net income at this time, but my guess is that when it is finally added up, the number will be in the hundreds of billions of dollars. Are you ready to tell your CFO how much of the number comes from your company?